Ways to avoid losses during Commodity Trading

"Risk comes from not knowing what you're doing." - Warren Buffett

Commodity Trading

When it comes to trading, equity trading is the first thing that comes to mind because it is so popular in the market, but it is important to realize that commodities are also an essential component of our ecosystem, especially for a country like India where agriculture contributes significantly to GDP.

The commodity market in simple terms is where products like oil, gold, metals or agricultural commodities are traded. Here, instead of finished products, traders deal in primary products or raw materials. Due to the higher risk of crashes or rallies, the market is also subject to a lot more speculation than the stock market. Hence, every investor or trader looking to foray into the commodity market must be prepared to face adverse circumstances. While the risks that come with trading commodities cannot be eliminated, there are certain ways to avoid or minimize losses. Here are some tips that can help you create a commodity trading strategy that minimizes risk and maximizes gains.

Commodities trading involves trading in every kind of movable property other than actionable claims, money, and securities. These include gold, silver, and other metals and select agricultural commodities.

Different ways of commodity trading:

There are two major ways through which commodity traders can trade:

Futures Contract: A commodity futures contract is an agreement between the buyer and the seller of the commodity. The buyers purchase a specific quantity of a commodity at a predetermined price. This contract remains until the price of the bought commodity has risen at the time of the expiry to make a profit.

Options Contract: An options trading contract is generally permitted in top commodities wherein the trader has the right but not a legal obligation to buy/sell the commodity at a fixed price. Such a contract helps investors to make a profit based on price fluctuations without having to buy/sell commodities.

Ways to avoid losses during commodity trading:

• Know Your Commodity: In order to avoid losing money in commodity, do your homework and look for a good broker / advisory.

• Do your homework: Use a practice account before you go live and be sure to keep analysis techniques to a minimum in order for them to be effective. It's important to use proper money management techniques and to start small when you go live.

• Strong Analysis: To be a good futures trader, you must understand technical and fundamental analysis and be able to apply them to spot trading opportunities. If you are a beginner, gaining the necessary knowledge and experience may seem like an enormous task. But a wealth of information can be found in books, magazines, and on futures-related websites.

• Diversification is the name of the game: Keeping in mind your financial goals, your best bet would be to diversify your portfolio. Have you ever heard the saying – ‘Don’t put all your eggs in one basket? If you have, do you understand its meaning? When you put your eggs in different baskets, if one basket gets damaged or if one egg is bad, you still have other baskets to fall back on. The same holds for commodity investing. Diversification should be the mantra for successful investing. Choosing a variety of commodities is vital in preventing losses. If your stocks are not working well then commodity will support as they are inversely corelated.

• Going against the Trends: The phrase- “Trend is your best friend” always works in the stock market. Not following the trend is another biggest mistake that day traders make. Unless a trader has many years of experience and understanding of the stock market, traders should try to avoid going against the trend. If the market is in a strong uptrend, then one should try to trade in the up direction only unless there is any strong resistance or chart pattern breakout. If the trader wants to trade against the trend, then they should set a stop loss to avoid losses.

• Pay Attention To Market Movements: This is one of the most fundamental commodity trading tips. In order to make the most of your investments, you should constantly keep an eye on market fluctuations. Not only will this help you pick the right strategies, but it will also steer you clear of common mistakes such as panicked decisions or following a herd mentality.

• Stop-loss can work wonders: Risks associated with market volatility can be minimized with the help of a stop-loss order. This order regulates the trade orders once the price has hit a certain amount. Without a stop-loss order, investors can sustain considerable losses which can force them out of the market. As soon as the market tilts in your favor, begin trailing your stop-loss point.

• Have a long term perspective: While it is true that commodity investing has the potential of quick returns, you should invest with a long-term perspective. There is no quick-fix formula for returns in commodity investing. You can ride on the market wave and make quick bucks when the market is rising but always think long-term for stable returns. Long-term investing reduces the risk associated with commodity trading.

• Past performance does not guarantee future profits: Another common mistake that many investors make is to rely on commodity past performance when selecting them for investment. Past performances can never give you the projected future return.

Conclusion

The bottom line is that if reasonable risks are taken, lucrative trading may also be done in the commodity market. By using & considering the above strategies we can have a better position as a trader in Commodity market & we can use commodity trading by being aware of a few techniques to keep our money safe when trading